The three-year exit runway: what to fix, in what order

Why three years, not three months

Three years matters because buyers weigh full fiscal years, and the improvements that matter most take at least one full year to appear.

Consider the arithmetic. Suppose you stop running personal vehicle and travel costs through the company this year. The current fiscal year is already part-way through, so the first clean year is next year. A buyer will typically look at the most recent two to three years. If you sell 12 months from now, the buyer sees one partial clean year and two years that still need adjustments. If you sell 36 months from now, they see two or three clean years, and your add-back schedule shrinks to a handful of well-documented items.

The same logic applies to people. A manager who took over your largest accounts last month is a promise. A manager who has held them for 18 months with steady retention is evidence.

Stage 1 (months 1 to 6): see the business the way a buyer will

Answer: find the gaps and decide the route before fixing anything.

1. Get an outside view. An exit readiness assessment or similar review across finances, earnings quality, owner dependence, housekeeping, people and route.
2. Pick a likely route. Outside sale, family, management or employees. The route changes what you prepare. See succession route planning.
3. Set your number, privately. Not a valuation, but the amount you need after tax to do what comes next. Your accountant and financial planner can help. Knowing it early stops you from chasing offers that can't work.
4. Assemble the team. An accountant who has worked on business sales, and a lawyer with corporate transaction experience. Your provincial law society, reachable through the Federation of Law Societies of Canada, can point you to directories.
5. Fix the cheap, obvious things. Bring the minute book up to date, find signed copies of key contracts, and make sure registrations with your provincial registry are current.

Stage 2 (months 6 to 18): clean the numbers and start the handover

Answer: this is the heavy-lifting stage, so change how you run the books and begin moving work off yourself.

Numbers.

• Separate personal and business spending completely, starting at a fiscal year-end if possible.
• Set your own pay at something close to the market cost of replacing you, or at least document the difference.
• Ask your accountant whether a higher level of financial statement (for example, reviewed rather than compiled) would help with likely buyers or lenders.
• Start a running normalization schedule. The guide to normalized earnings shows how.
• Track month-end working capital: receivables, inventory, payables.

People and owner dependence.

• Map every relationship, decision and skill that sits only with you.
• Promote or hire the second layer of management, and give them real decision rights.
• Begin planned introductions to key customers, starting with the least sensitive.
• Write short procedures for the processes that matter most. The owner-independence plan covers the method.

Contracts.

• List contracts that matter to value: leases, major customer and supplier agreements, licences, franchise or dealer agreements.
• For each, find out with your lawyer whether it can be assigned to a buyer, or whether a change of control needs consent.
• Where a key lease is close to expiry, consider renewing on terms that a buyer could take over.

Stage 3 (months 18 to 30): prove it

Answer: stop changing things and let the results accumulate.

This is the stage owners find frustrating, because it looks like nothing is happening. In fact, you are building the track record. Keep the books clean, keep the managers in charge, keep customer retention steady, and avoid big, unusual decisions that would need explaining.

Useful work in this stage:

• Re-score the business every six months against your original assessment.
• Reduce concentration. If one customer is more than a fifth of revenue, work on winning others. Even a few percentage points matter.
• Build recurring revenue where your model allows it, through service agreements, contracts and subscriptions, and keep records of renewals.
• Start the data room. Not for a buyer yet, but so documents are collected while people still remember where they are. The data room checklist is a starting list.
• Consider a valuation estimate from a Chartered Business Valuator to calibrate expectations, if your accountant agrees it would help.

Stage 4 (months 30 to 36): prepare to go to market

Answer: package what you have built, and get the professional team ready.

• Finalize the data room and the written business profile.
• Decide, with your advisers, whether to hire a broker or M&A adviser, and on what terms. (Their fee arrangements are between you and them; get them in writing.)
• Ask your accountant and lawyer to walk you through likely structures: share or asset sale, what an earn-out or seller note would mean for you, and the tax implications.
• Agree on a confidentiality process: who can see what, and when.
• Plan your own transition: how long you are willing to stay, and in what role.

Deal preparation covers this stage in detail.

What not to do during the runway

• Don't starve the business to inflate profit. Cutting marketing, maintenance or staff in the final year raises short-term profit, and experienced buyers recognize it immediately.
• Don't start big new ventures that need years to pay off. They depress earnings and complicate the story, unless they are already working and documented.
• Don't let records drift once they're clean. One messy year in the middle undoes much of the work.
• Don't treat an unsolicited offer as a deadline. If an offer arrives early, the readiness work tells you whether you can take it seriously, and on what terms.

A one-page version

Where to go from here

If you are at the start of the runway, the exit readiness assessment is the natural first step. If you are part-way through, look at whichever stage you are in and check the list honestly. Either way, the services overview shows how we can help, and you can call, text or email to talk it through.